Trex Company, Inc.

Third Quarter 2022 Earnings Conference Call

Monday, October 31, 2022, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Bryan Fairbanks - President and Chief Executive Officer

Dennis Schemm - Senior Vice President and Chief Financial Officer Amy Fernandez - Vice President, General Counsel

Viktoriia Nakhla - Investor Relations

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PRESENTATION

Operator

Good afternoon, and welcome to the Trex Company Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the "*" key followed by "0." After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*" then "1" on your telephone keypad, to withdraw your question, please press "*" then "2." Please note, this event is being recorded.

I would now like to turn the call over to Viktoriia Nakhla. Please go ahead.

Viktoriia Nakhla

Thank you all for joining us today. With us on the call are Bryan Fairbanks, President and Chief Executive Officer and Dennis Schemm, Senior Vice President and Chief Financial Officer. Joining Bryan and Dennis is Amy Fernandez, Vice President, General Counsel as well as other members of Trex management.

The company issued a press release today after market close, containing financial results for the third quarter 2022. This release is available on the company's website. This conference call is also being webcast and available on the investor relations page of the company's website for 30 days.

I would now like to turn the call over to Amy Fernandez. Amy.

Amy Fernandez

Thank you, Viktoriia. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of Federal Securities Laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Q as well as our 1933 and other 1934 Act filings with the SEC.

Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measure can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

With that introduction, I will turn the call over to Bryan Fairbanks.

Bryan Fairbanks

Thank you, Amy, and good evening. Thank you for joining us today to review our performance through the third quarter '22 and discuss our business outlook. Third quarter results were in line with the expectations signaled last quarter. While consumer sell-through demand remained at healthy levels, our distribution and dealer partners used the quarter to service demand requirements primarily through inventory drawdown's rather than reorders. Our internal data and market intelligence gives us confidence that the inventory recalibration will be completed by the end of '22.

Trex Company, Inc. Monday, October 31, 2022, 5:00 PM Eastern

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During this period of inventory destocking, we took measures to align our cost structure with the current demand by decreasing production levels, rightsizing our employee base and focusing on cost efficiency programs. Concurrently, we retained our most experienced manufacturing talent, enabling us to efficiently ramp up production as demand rebounds. In addition, we refocused our efforts on production improvements, that we were less able to pursue while operating at full capacity. We believe these initiatives will allow us to navigate effectively through the current macroeconomic environment, and lay the groundwork for enhanced profitability when growth resumes.

Despite rising interest rates, we continue to see healthy consumer demand. As the market leader in our category, we are confident in our ability to operate in this environment from a position of strength. Our tie to the repair and remodel sector makes us more resilient than many other sectors.

Homeowners priced out of moving tend to invest in their existing homes with their existing lower rate mortgages and pursue renovations, especially those that add long-term value like a Trex deck. Further, the average age of housing stock in the US is approximately 40 years old, driving further remodeling spend. The great majority of Trex buyers are financially stable and are cash buyers who will be less impacted by higher interest rates and inflation. All of these items support continued repair and remodel spend for Trex decking.

With our solid financial position, we continue to invest in branding and product innovation to enhance Trex's ability to drive consumer demand for environmentally friendly outdoor living products.

Recall, we launched our new Trex Transcend Lineage product late in Q2, and it has been favorably received in the market. The new decking line features refined aesthetics and trend- forward colors with heat mitigating technology, and like all Trex decking, is made from 95% recycled and reclaimed content. We plan on further product introductions in 2023.

Our integrated marketing campaign launched in early 2022 continues to highlight how Trex homeowners transform their outdoor dream ideas into reality with continually refreshed social, digital and online content amplified by media, retail, strategic partnerships and more. Likewise, we continue to support long-term growth by expanding our industry-leading distribution network. In September and October, we partnered with two additional distribution locations in Texas, enabling us to service and expand the availability of Trex outdoor living products in one of the fastest growing markets.

Our distributor network has a well earned reputation for providing outstanding service to their customers through the best distributor sales representatives and management in the industry. Distributors prefer to work with Trex because we produce the highest quality products, manufactured with superior engineering, and offered at competitive price points, while leading our category in sustainability and environmental standards. With our selective and long-standing channel relationships, we collectively offer the most relevant products and service levels to our customers every day.

During the third quarter, we continued to generate free cash flow, invested in our operations, repurchase shares of our outstanding common stock and continued our manufacturing expansion in Arkansas. The modular development approach for this third manufacturing facility is calibrated to demand trends for our Trex decking products.

Trex Company, Inc. Monday, October 31, 2022, 5:00 PM Eastern

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Arkansas remains a key aspect of our growth strategy, due to its strategic advantages, including increased proximity to central raw materials, a strong pool of qualified and skilled labor, adjacency to major transportation hubs and is situated near key growth markets for wood conversion. When this plant comes online, Trex will have unmatched geographical coverage with East Coast, West Coast and Central region sites that serve our customers. The facility will also support our long-term growth opportunities in the international and cladding markets.

Now, I will turn the call over to Dennis to provide a more detailed view of our financial performance. Dennis?

Dennis Schemm

Thank you, Bryan, and good afternoon to everyone. I will discuss Trex's third quarter results and year-to-date performance, reaffirm our financial outlook for the fourth quarter and provide annual guidance for 2022.

Third quarter 2022 net sales were $188 million, in line with our guidance last quarter, reflecting an inventory recalibration by our distributors and dealers, as they met demand partially through inventory drawdowns rather than reordering product. Trex Residential net sales were $178 million compared to $319 million in the same quarter last year. As previously communicated, between the third quarter of 2021 and the second quarter of this year, the channel built approximately $200 million of inventory due to the expectations for volume growth in 2022.

As noted in our prior call, sell-through was roughly flat year-on-year through the second quarter. In the back half of this year, we anticipate this inventory will be consumed, as the channel reestablishes new inventory targets reflective of the current macroeconomic concerns, and expect our channel will enter the next calendar year with lower inventories than in 2021. Inventories have declined in line with our expectations.

Consolidated gross margin was 24.5% in the third quarter 2022, compared to 38.2% in the year ago quarter. The decrease is primarily due to lower production levels at Trex Residential, resulting from our distribution and dealer inventory recalibration.

Selling, general and administrative expenses were $27 million, or 14.2% of net sales, compared to $34 million, or 10.1% of net sales, in the 2021 quarter. SG&A in the third quarter 2022 included a $1.2 million severance charge for employee reductions. The decrease in SG&A primarily related to a decrease in company incentive costs, partially offset by an increase in marketing and branding spend and the severance charge.

Net income for the third quarter 2022 was $14 million, or $0.13 per diluted share, compared to $74 million, or $0.64 per diluted share, in the third quarter 2021. Excluding the severance charge in the third quarter of 2022, net income was $15 million, or $0.14 per share. Third quarter 2022 EBITDA was $31 million, and EBITDA margin was 16.4%, consistent with our expectations. Excluding the severance charge, EBITDA margin was 17%.

During the third quarter 2022, we repurchased 1.7 million shares of our outstanding common stock totaling $100 million, and have 2.6 million shares remaining as of the end of the quarter that may be repurchased under the program.

Now briefly summarizing year-to-date results. Consolidated net sales were $914 million, up from $893 million reported in the year ago period. Trex Residential net sales increased 3% to $879 million, with Trex Commercial contributing $35 million.

Trex Company, Inc. Monday, October 31, 2022, 5:00 PM Eastern

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SG&A was $106 million year-to-date 2022, or 11.6% of net sales, compared to $103 million, or 11.5% of net sales, for the prior year period. In contrast, for 2023, we expect SG&A will increase as a percentage of net sales due to increased branding spend to support sales volumes. We also expect to return to a more normalized management incentive expense.

Net income for the nine-month period was $174 million, or $1.55 per diluted share, compared to $184 million, or $1.59 per diluted share. EBITDA year-to-date was $265 million resulting in an EBITDA margin of 29%, compared to EBITDA of $271 million and EBITDA margin of 30.3% during the same period in the prior year.

From a cash flow perspective, we generated cash from operations of $244 million year-to-date. We invested $108 million in CAPEX, primarily related to cost reduction initiatives and other investments back into the core, the new Arkansas manufacturing facility and our new corporate headquarters.

As we turn to the outlook, we reaffirm our Q4, 2022 guidance for net sales of $180 million to $190 million, and EBITDA margin of 22% to 25%. The significant sequential increase in the EBITDA margin reflects our decisive actions to right size our cost base, including employee and production optimization and supply chain improvements. We believe the channel inventory drawdown will be substantially completed by year-end and that the channel inventory will then be in line to start the 2023 season.

Now, turning to our 2022 annual guidance. We are seeing the following:

  • EBITDA margin of 27% to 29%,
  • SG&A in the range of 12% to 13% of net sales,
  • An effective tax rate of approximately 25%, and
  • Depreciation in the range of $40 million to $45 million.

Capital expenditure guidance remains in the range of $170 million to $180 million, as we continue to build out our Arkansas facility at a measured pace. This development is modular and calibrated to demand trends for Trex Residential outdoor living products.

With that, I'll now turn the call back to Bryan.

Bryan Fairbanks

Thank you, Dennis. For more than 30 years, Trex has invented, reinvented and defined the composite decking and outdoor living category. Trex entered this period of uncertainty in its strongest competitive and economic position. As a leader in a growing market, we are confident that Trex is well positioned to effectively navigate economic challenges.

Our strategy remains focused on converting consumers to the performance advantages of composites over wood, while continuing to operate in a sustainable and socially responsible manner. We are poised to take advantage of long-term growth opportunities supported by our people, channel partners, the industry-leading brand, market-leading products, low-cost manufacturing and relentless focus on efficiency.

Operator, please open the call to questions.

QUESTION AND ANSWER

Trex Company, Inc. Monday, October 31, 2022, 5:00 PM Eastern

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Trex Company Inc. published this content on 15 November 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 15 November 2022 14:41:03 UTC.